There are different rules when it comes to claiming the tax depreciation deduction for residential and commercial property. And these rules differ yet again when these properties are held within different entities, it is important that they claim their available tax depreciation deductions and don’t miss out on potentially claiming thousands and sometimes hundred-of-thousands.

We don’t want our mutual clients potentially missing information that could be lost in translation. Being specialist in this area, we are very clear on what the legislation and opportunities are regarding these rules. Below are common mistakes we are seeing by accountants when interpreting the legislation changes:

Investment Property Held Under:

  • Proprietary Limited Company;
  • Self Managed Super Funds;
  • Individuals;
  • Commercial Owners;
  • Commercial Tenants.

Proprietary Limited Company

Pty Ltd companies that own either residential or commercial investment properties, are entitled to annual claims for Division 40 (plant and equipment) assets that are brand-new or existing/second-hand. Additionally, these entities are able to claim the tax depreciation deduction for the Division 43 structural component as well.

The changes in the legislation in May 2017, didn’t affect how Pty Ltd Companies are able to claim for Division 40 existing plant and equipment assets.

Some accountants and advisers have confused this with “individuals” who cannot claim upfront claim for Division 40 existing plant and equipment assets.

Self Managed Superannuation Funds

Depreciation is one area that we have found can be overlooked by trustees and accountants of Self Managed Super Funds. When a property is setup in this structure, SMSF’s are eligible to claim all of the allowable expenses and deductions associated with the ownership of that property, including depreciation.

With SMSF’s able to claim the tax depreciation deduction, this could help to reduce the taxable income, or create a tax return or a contribution to the SMSF.

By not claiming the depreciation deduction, SMSF’s may overpay taxes by thousands each year.

Case study example:

Our clients Seb purchased a warehouse consisting of 102sqm of office/showroom space, bathroom amenities, a kitchenette and 195sqm of warehouse space through their SMSF in March 2021. They purchased the warehouse for $605,000 with a rental income of $690 per week, which gives a total income of $35,880 per annum.

The tax deductible expenses for the warehouse which include interest rates, land rates, management fees and maintenance total $41,429. This means that the SMSF warehouse has a taxation loss $5,549 before going to their accountant and completing their tax return.

The table below outlines the difference in cash flow to Seb without claiming tax depreciation and with claiming depreciation for the SMSF warehouse.

table 1 Common mistakes accountants make SMSF

If Seb didn’t claim tax depreciation on their SMSF warehouse they would be making a loss of $69.36 per month. 

Seb took his accountants advice and contacted Capital Claims Tax Depreciation to complete a tax depreciation schedule for their SMSF warehouse.  This allowed him to claim his tax depreciation entitlements and create an additional $226.55 per month for their SMSF.

Individuals

Individuals are one group that we find are often missing out on claiming thousands due to the common misconception of some accountants thinking it isn’t worth claiming tax depreciation deductions for existing properties. This misunderstanding was exacerbated greatly with the legislation changes back in May 2017.

Four years on we still have conversations with accountants and property investors to say that individuals can still claim substantial tax depreciation deductions.

Individuals are entitled to claim upfront for Division 43 which is the structural part of depreciation. Division 43 tax depreciation results hold steadily over future financial years. Renovations that have been completed by the individual can be claimed and even for previous owners renovations if they are qualifying.

Plus, individuals can still claim for Division 40 – plant and equipment assets in two ways:

  • Upfront for any brand-new plant and equipment assets ie. stove, carpet that they have installed;
  • For existing Division 40 - plant and equipment assets ie. stove, carpet, a value is placed against those assets and will be reported within our tax depreciation schedule known as the Capital Gains Tax Offset Report.

The value of the plant and equipment assets together, is reported in each financial year moving forward and will decrease over time. When the individual sells, go to the CGT Offset Report and place the Division 40 value against the Capital Gains Tax to help reduce.

Case Study

Eve purchased this existing four-bedroom house for $490,000 in Jan 2020. No renovations have been completed by Eve or previous owner. Eve is receiving $500 per week with a total rental income of $26,000 per annum. Without a tax depreciation schedule, Eve’s tax deductible expenses for the 2021 financial year for the property totalled $33,776. Eve’s tax bracket is 37%.

When the tax depreciation schedule was included, the first full financial year calculations gave Eve an additional $1,955. Weekly cash flow back to Eve is $37.60.

Table 2 for common mistakes

Despite her accountant thinking that because she purchased the property second hand-hand it wasn’t worth it, Eve contacted Capital Claims Tax Depreciation to check.  This schedule outlined that Eve was entitled to a depreciation deduction of $4,585 in the first full financial year and $22,925 across the first five financial years of owning for her property. 

Also, Eve’s property falls under the current legislation where a value is assigned for existing plant and equipment assets – Division 40. This may help reduce Capital Gains Tax when the property is sold.  If Eve sells her property in 5 years, she is entitled to claim $22,073 to offset against her Capital Gains Tax liability.

Commercial Owners

At Capital Claims Tax Depreciation, we have had commercial property investors miss out on claiming thousands and sometimes hundreds of thousands in tax depreciation deductions. And the reasons for this:

  • Their old accountant just didn’t claim the tax depreciation deduction for them; 
  • The “Scrapping” component of tax depreciation wasn’t claimed. This is when the commercial property owner removes the old fit-out. They are entitled to claim tax depreciation for the residual value that is left in the building works that has been demolished, or in assets that are being removed/replaced. This is known as a Scrapping Report. For more information about Scrapping read our popular article Refurbishing Business Spaces;
  • An individual who is a beneficiary of a discretionary trust or a ‘potential beneficiary’ of a trust are entitled to amend up to four previous financial years.

Cashflow is critical for commercial owners, claiming all their available tax deductions and ordering a quality commercial tax depreciation schedule from a quality tax depreciation provider is certainly one way to help.

A commercial tax depreciation schedule can be more complex than a residential tax depreciation schedule, our team of experts will complete a thorough site assessment and will review the contract of sale, inventories and lease arrangements to ensure maximum results and compliance.  

Below are some results we've achieved for a handful of our commercial clients are below:

 Commercial Property Deductions Table

 

Commercial Tenants

Commercial Tenants unfortunately can miss out on claiming tax depreciation deductions for the fit-out that they have completed.

When a tenant leases a commercial space, a fit-out is often completed by them in order to operate their business. Whether it is a new retail space that once was an office space or a commercial space that is being converted into a dental surgery.

With each different industry (ie. mechanic, hair salon, medical, office, hospitality) there are different Division 40 plant and equipment assets installed that can be claimed. Additionally, there are often for Division 43 (structural additions or improvements made to the building) that are also claimable.

Commercial tenants have the opportunity to increase their cash flow by claiming substantial commercial property depreciation deductions.

Our article ‘What can I claim as a commercial tenant’ includes a case study where the clients where astonished with our results and couldn’t believe that they had missed out, but thankfully were able to back claim.

A common thread that some of our commercial tenants have said, ‘We just didn’t know about it, and our accountant at the time wasn’t claiming it for us.’

Case Study

Brendan’s company obtained the leasehold for this Inner-City Pub located in Sydney in 2020. The leasehold had a partially fitted-out bar.  Brendan’s company completed the fit-out for approx. $500,000. The property has multiple bars and food. Below our Brendan’s results we achieved for him:

 table for common mistakes accountants make

 

Don’t let your clients tax depreciation deductions be unclaimed for their investment property. We are always happy to have a conversation with you about your clients residential or commercial property investment scenario. Please chat to our expert team on 1300 922 220. Or you can send an email to info@capitalclaims.com.au.

About Mark Wilkins

Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.

View all posts by Mark Wilkins

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